Let me try to see if I’ve got this right. The Fed’s remorseless cutting of interest rates whenever the American economy began to slow has fostered and perpetuated a series of bubbles. The technology bubble of the nineties was replaced by the housing bubble of the noughties – consumption was never brought back down to earth after the collapse of internet stocks, because Americans were encouraged to treat their properties as sources of easy income. Low interest rates were one half of the policy package that enabled this – the other half was deregulation. ‘Financial innovation’ ensured that the whole world and his dog could take out mortgages – increasing demand for housing, which increased house prices, which perpetuated the illusion that you couldn’t lose by taking out a mortgage, even if under normal circumstances, without rapid house price inflation and easy credit, you wouldn’t have been able to afford it. The consumption that kept the economy going was based on credit; increasing availability of credit was based on a bubble; and now the bubble’s burst we’re going to see declining living standards for large sections of America’s population. To say nothing of the rest of the world.
Plus, what’s true of the average American consumer is also true of America as a whole. America’s prosperity since the 1980s has been partly based on massive borrowing from the growing Asian economies. But the ability to borrow is premised on the supposed ability to repay; and if American growth is based on consumption based on this same borrowing, it’s kind of unclear where the money’s going to come from. Hence the decline in the value of the dollar – the massive global imbalance of America’s current account deficit is being reduced by the market’s revaluation of America’s currency.
One of my favourite d-squared posts is about the collapse of the Russian economy in the wake of its neoliberalisation. D-squared asks the question – exactly why would a botched privatisation program, which placed Russia’s assets in the hands of a small group of oligarchs, reduce GDP by 42% and starve a million people to death? “Terribly unfair and corrupt or not, handing over ownership of a factory from this bunch of gangsters to that bunch of gangsters doesn’t stop the wheels turning.” The really stupid neoliberalisation policy, d-squared says, was the imposition of foreign exchange and capital markets, which enabled the oligarchs to stash all their wealth overseas, converting it into dollars. Result: a catastrophic reduction in domestic liquidity and, therefore, demand – i.e. depression.
D-squared’s post ends with a nasty little twist. “Note that most of the bad effects of the kleptocrats took place because they converted their (local currency) profits of theft into dollars, draining the economy of hard currency. Because of this, we can credibly hypothesise that there is one case in which you could hand the entire economy over to robber barons and it wouldn’t really matter at all. That would be the case in which the local currency is the global reserve currency, so that the kleptocrats are happy holding their wealth in the local currency. In other words, the one country which has literally nothing to fear from becoming a gangster state in the United States of America.”
Unfortunately, the Bush administration is in the process of proving that hypothesis wrong. In the short term there’s no drain on domestic liquidity from the ruling elite’s theft of ordinary people’s wealth. But this only holds so long as the dollar remains the world’s reserve currency – and the dollar is only the reserve currency because of America’s economic credibility. Because the money the ruling elite has been stealing isn’t actually America’s money, the status of the dollar as the world reserve currency is under intense strain.
American policy since the eighties has been driven by the desire to further enrich a tiny fraction of the population: massive tax cuts go hand in hand with attacks on the earning power of labour. If the economy is to keep growing, however, American consumers need to keep spending; and that’s hard to achieve when wages stagnate, or are reduced. The ruling class’s solution was to generate workers’ incomes through debt, rather than wage increases. The credit bubble was a way of upwardly redistributing America’s wealth, without a short-term decrease in consumer spending. A systematic robbery has taken place, hidden by debt, and only now are Americans discovering how much of their real wealth has been confiscated.
Furthermore, the borrowing from Asian economies that was necessary to fund a level of national consumption higher than the level of national income allows the ruling class to appropriate that money, too. And when the other shoe drops, the ruling class are not the ones who are indebted – ordinary Americans are. You can’t get a much clearer example of conflicting class interests. America’s ruling class has got rich beyond the dreams of avarice by undermining the prosperity of the nation the interests of which they’re supposed to be representing.
America resembles those bond insurers we’ve been reading so much about. Just as the insurers’ AAA rating allowed them to make a mint by guaranteeing subprime debt, so the dollar’s status as reserve currency allowed America to engage in the most incredible financial recklessness, secure in the knowledge that everyone would still have confidence in its long term solvency. But confidence can only withstand so much recklessness. The subprime mortgage fiasco is now destroying those AAA ratings, and, for the same reasons, the dollar’s status as reserve currency is looking weaker by the day.
At any rate, this is what George Soros suggests in his recent FT article: “the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency.” Soros foresees “a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.” Will this crisis be the tipping point in which the Yuan replaces the dollar as the world reserve currency? Is this the end of American economic hegemony? I have no idea – I don’t know what I’m talking about. But I’ve picked an interesting time to try to understand economics.
[NB: Of course, what the above neglects is that much ‘American’ wealth, appropriated from ordinary Americans by the ruling class, is itself already appropriated from poorer countries through American economic hegemony. Plus – much of what is said here of ‘America’ could be said with equal justice of ‘the developed world’ in general. Like I say – I don’t know what I’m talking about.]